Investors regain confidence in America-listed Chinese stocks

Over the last year, the Chinese government has been cracking down on its technology stocks, especially the ones deemed to abuse their monopoly powers in the antitrust and cybersecurity operation.

These include brands listed in American exchanges such as Alibaba, Baidu, Tencent, Weibo, Didi, and Xpeng. This led to a massive selloff in 2021 that saw some stocks shed up to 80 percent of their value from their 2021 highs.

Investors from America and Europe fled the Chinese stocks in panic as they did not know how long the crackdown would last. The Hang Seng tech index saw its investors lose a record $1.6 trillion since the February 2021 peak, according to a recent article by Fortune Media IP.

As a result of this crackdown, big farms are axing thousands of employees at ago. Tech firms that were offering private online tutoring such as ByteDance are the most affected since they provide significant jobs to the people of rural China. They were forced to scale down their staff in response to the crackdown.

Alibaba and Tencent alone are planning to axe over 140,000 employees this year. In addition, Kuaishou, the short video app, may cut between 10 percent to 30 percent of its workers this year.

Since October 2021, Chinese unemployment rate has reversed direction and is now becoming a big concern for Beijing. From a low of 4.9 percent in October, the unemployment rate has rallied to 5.5 percent in February and could accelerate further.

This year, over 10 million Chinese graduates are expected to enter the job market and this could increase pressure on the already stressed market.

The Evergrande saga has morphed into a real estate crisis in China where developers are unable to honour their debts indicating the extent of the economic hit from the covid-19 pandemic.

Evergrande, China’s biggest property developer has seen its stock drop over 88 percent in the last year after it indicated signs of inability to honour its maturing debts.

Sunac, the third-largest property developer by sales in China was downgraded to B- credit rating by the agency S&P on Thursday. The company has $4 billion worth of debt that is maturing this year and its financial statements indicate that it could default.

This week, several Chinese property developers were unable to release their full-year 2021 financial earnings reports citing various reasons. This is a red flag, and it indicates that there could be a fundamental reason leading to this.

In December last year, China announced a $188 billion stimulus package to support the real estate sector and avoid a full-scale crash. Beijing also promised to implement further measures to strengthen the sector.

This was the first sign that China’s priority was shifting from regulatory tightening to economic stability and growth.

On Wednesday, Beijing announced a cooperation plan on US-listed Chinese stocks to support China reach its gross domestic product (GDP) goal of 5.5 percent in 2022-3. The announcement promised to complete the crackdown on tech stocks as soon as possible to boost jobs and facilitate economic growth.

Since this week’s change of tone by Beijing indicating a focus on economic growth, job creation, and economic stability, investors have taken the news as a sign of good days to come. The optimism has driven Alibaba shares up over 57 percent, JD.com over 50 percent, and Pinduoduo over 111 percent.

The key concern for investors of US-listed Chinese stocks will be the audit of Chinese companies by US authorities for the purpose of reporting earnings, which have been a major point of contention since the Trump era. Chinese firms are unable to deliver complete data due to privacy concerns from Beijing.

Negotiations are ongoing and this could be resolved this year.

Investors are also concerned about the ongoing invasion of Ukraine by Russia as well as the rising number of covid-19 cases in mainland China that have led to lockdowns in some areas.

Ongoing economic stimulus programme is targeted at making credit accessible to home buyers at low-interest rates. This could take the real estate sector into higher levels of debt and/or raise house prices higher.

Many Kenyans may not know this, but they can trade these stocks directly using a smartphone. All they have to do is open an online account with a CMA-regulated broker such as Scope Markets, deposit money using M-Pesa, and start benefiting from the growth in these stocks.

Rufas Kamau is a Research & Markets Analyst at Scope Markets